Method of administering an investment fund that seeks to provide regular monthly payments without consuming principal

ABSTRACT

A method of administering an investment fund. The method includes the steps of creating shares for sale, providing a managed distribution schedule identifying a number of payments to be provided during each of consecutive periods, providing an investment strategy for investing in assets to provide funds sufficient to meet the managed distribution schedule, issuing a share to an investor in exchange for funds received from the investor, investing the received funds according to the investment strategy, calculating the value of each of the payments to be provided according to the managed distribution schedule in a period to the investor, and providing each of the payments to the investor during the period. Each payment is calculated according to a formula that specifies that the value of each payment is based on a trailing Net Asset Value (NAV) of the investor&#39;s share.

CROSS REFERENCE TO RELATED APPLICATIONS

This application claims priority from U.S. Provisional Application No.60/993,746, filed Sep. 14, 2007, the contents of which are hereinincorporated by reference in their entirety for all purposes.

BACKGROUND OF THE INVENTION

Many investors arrive at retirement with substantial assets accumulatedover years of disciplined saving and prudent investing. Often, theseinvestors are concerned about how best to use their assets to meetmonthly retirement expenses, while at the same time preserving theirassets for heirs, philanthropy, or other purposes. Traditionally, theseinvestors have had three basic options for generating retirement income:

1. A “planned withdrawal program,” in which an investor gradually spendsa limited portion of assets over a set period, with the remaining assetsinvested for long-term retirement goals.

2. A “guaranteed income option,” in which an investor turns over assetsto an insurance company and purchases a fixed immediate annuity thatprovides guaranteed income for life.

3. A “spend only the income strategy,” in which an investor spends onlythe dividend and interest income generated by his or her retirementportfolio, leaving the principal intact.

SUMMARY OF THE INVENTION

According to one aspect, the present invention includes an embodiment ofa method of administering an investment fund. The method includes thesteps of creating a plurality of shares in the investment fund for sale,providing a managed distribution schedule identifying a number ofpayments to be provided during each of a plurality of consecutiveperiods, providing an investment strategy for investing in assets toprovide funds sufficient to meet the managed distribution schedule,issuing at least one share to an investor in exchange for funds receivedfrom the investor, investing the received funds according to theinvestment strategy, calculating the value of each of the payments to beprovided according to the managed distribution schedule in a period, andproviding each of the payments to the investor during the period. Themanaged distribution schedule includes a formula for calculating a valuefor each of the payments in the period. The formula specifies that thevalue of each payment equals 1/nth of a predetermined percentage of adesignated value corresponding to one of the plurality of shares. Thenumber, n, equals a number of payments to be made in the period, and thedesignated value equal a trailing Net Asset Value (NAV).

According to another aspect, the present invention includes anotherembodiment of a method of administering an investment fund. In thisother embodiment, the method includes the steps of creating a pluralityof shares in the investment fund for sale, providing a manageddistribution schedule identifying a number of payments to be providedduring each of a plurality of consecutive periods, issuing at least oneshare to an investor in exchange for funds received from the investor,investing the received funds in assets including cash, securities,derivatives and other investments, and providing payments to theinvestor in a period according to the managed distribution schedule. Themanaged distribution schedule includes a formula for calculating a valuefor each of the payments. The formula specifies that the value for eachpayment in the period equals 1/nth of a predetermined percentage of adesignated value corresponding to one of the plurality of shares. Thenumber, n, equals a number of payments to be made in the period, and thedesignated value equals a trailing Net Asset Value (NAV).

BRIEF DESCRIPTION OF THE FIGURES

The invention is understood from the following detailed description whenread in connection with the following figures:

FIG. 1 illustrates an investment fund comprising an investmentportfolio, in accordance with an embodiment of the present invention;

FIG. 2 illustrates a flow diagram of a method of constructing andmanaging the fund illustrated in FIG. 1, in accordance with anembodiment of the present invention;

FIG. 3 illustrates a flow diagram of a method of constructing andmanaging an investment portfolio of the fund illustrated in FIG. 1, inaccordance with an embodiment of the present invention;

FIG. 4 illustrates an exemplary plot of the probabilities of variousinvestment funds of maintaining real spending power after 20 yearsversus the probabilities of payments made by such funds declining by 5%from one year to the next, in accordance with an embodiment of thepresent invention;

FIG. 5 illustrates a capital markets model employed by the methodillustrated in FIG. 3, in accordance with an embodiment of the presentinvention; and

FIG. 6 illustrates exemplary distributions of outcomes generated bysimulations of the capital markets model illustrated in FIG. 5 forselected asset classes, in accordance with an exemplary embodiment ofthe present invention.

DETAILED DESCRIPTION OF THE INVENTION

Retirees generally have two basic needs in retirement funds: (1) regularmonthly payments to help meet retirement expenses, and (2) thepreservation of retirement savings for future use.

Referring now to FIG. 1, there is illustrated an investment fund 100comprising an investment portfolio 110 and a plurality of shares 120.Portfolio 110 comprises a plurality of securities and other investments(collectively referred to herein as “securities”). The securities maycomprise any of stocks (e.g., U.S. stocks or foreign stocks, such asemerging-market stocks), bonds, commodity futures, inflation-indexedsecurities (e.g., Treasury Inflation Protected Securities (“TIPS”)),shares in real estate investment trusts (“REITs”), hybrid securities,currencies, options on securities or securities indexes, futurescontracts, options on futures contracts, credit default swaps, totalreturn swaps, forward foreign currency agreements and other derivatives.The securities in portfolio 110 may further comprise shares in one ormore funds, such as stock funds, funds that track the Europe,Australasia, and Far East (“EAFE”) Index, funds that track the LehmanAggregate Bond Index, commodities funds, money market funds, equitymarket neutral funds, absolute return funds, etc. In embodiments of fund100 where portfolio 110 includes shares in one or more investment funds,fund 100 may be described as a “fund of funds.” It is understood thatthe descriptor, “fund of funds,” however, does not exclude fund 100 fromowning other types of securities directly. Thus, fund 100 may becharacterized as a “fund of funds” even while owning stock, bonds,futures, etc. directly in portfolio 110.

In the embodiment of fund 100 illustrated in FIG. 1, portfolio 110includes one or more U.S. stocks, one or more emerging market stocks,one or more shares in one or more EAFE Index funds, one or more sharesin one or more Lehman Aggregate Bond Index funds, cash, one or moreTIPS, one or more shares in one or more REITs, one or morecommodity-linked instruments, one or more shares in one or more equitymarket neutral funds, and one or more shares in one or more absolutereturn funds. Fund 100 is formed and managed by a fund administrator(not illustrated).

Referring now to FIG. 2, there is illustrated a method 200 forconstructing and managing fund 100 and providing payments toshareholders, in accordance with an exemplary embodiment of the presentinvention. Method 200 begins with a step 210 of establishing a manageddistribution policy of fund 100 at the inception for fund 100. Morespecifically, in step 210, fund 100, or more specifically theadministrator of fund 100, establishes a managed distribution policy(also called a “payment schedule”) to determine how payments of fund 100are to be calculated, sourced and distributed to shareholders in fund100 over the life of fund 100. Method 200 continues to a step 220 inwhich the administrator of fund 100 establishes investment objectives,investment strategies and performance targets for fund 100 to allow fund100 to achieve its managed distribution policy.

The investment objectives, investment strategies, performance targets,and the managed distribution policy of fund 100 determine how fund 100is structured and managed. Generally, the administrator chooses theinvestment objectives, investment strategies, performance targets, andmanaged distribution policy to allow fund 100 to operate to the extentpossible without consuming capital.

Several exemplary embodiments of fund 100 are described herein. In eachof the several embodiments of fund 100, the specifics of the investmentobjectives, investment strategies, performance targets, and manageddistribution policies differ as follows:

In a first embodiment of fund 100 (herein “Fund A”), the administratorof fund 100 seeks to generate total returns sufficient to sustain amanaged distribution policy while providing inflation protection andcapital appreciation over the long term. The managed distribution policyof Fund A is based on an annual distribution rate equal to 3%. Thus, theinvestment objective of Fund A is to seek to make monthly distributionsof cash while providing inflation protection and capital appreciationover the long term, and the investment strategy is tailored to achievethis investment objective.

In a second embodiment of fund 100 (herein “Fund B”), the administratorof fund 100 seeks to generate total returns sufficient to sustain amanaged distribution policy while providing inflation protection andcapital preservation over the long term. The managed distribution policyof Fund B is based on an annual distribution rate equal to 5%. Thus, theinvestment objective of Fund B is to seek to make monthly distributionsof cash while providing inflation protection and capital preservationover the long term, and the investment strategy is tailored to achievethis investment objective.

In a third embodiment of fund 100 (herein “Fund C”), the administratorof fund 100 seeks to generate total returns sufficient to sustain amanaged distribution policy while preserving capital over the long term.The managed distribution policy of Fund C is based on an annualdistribution rate equal to 7%. Thus, the investment objective of Fund Cis to seek to make monthly distributions of cash while providing capitalpreservation over the long term, and the investment strategy is tailoredto achieve this investment objective.

Although method 200 indicates the flow of the method progressing fromstep 210 to step 220 (the flow being indicated by the arrow extendingfrom step 210 to step 220), it is contemplated that steps 210 and 220may be performed in any order. Thus, the administrator of fund 100 mayestablish a managed distribution policy for fund 100 at its inception instep 210 and then develop investment objectives, investment strategiesand performance targets for fund 100 in step 220 to satisfy the manageddistribution policy, or the administrator of fund 100 may establishinvestment objectives, investment strategies and performance targets forfund 100 in step 220 and then develop a managed distribution policy instep 210 to make distributions resulting from the investments of fund100. Furthermore, although method 200 indicates that the investmentobjectives, investment strategies and performance targets are developedin one step (step 220), it is contemplated that the investmentobjectives, investment strategies and performance targets may each bedeveloped in separate sub-steps.

The Managed Distribution Policy of Fund 100

The managed distribution policy of fund 100 generally provides for theperiodic distribution of a targeted amount of cash (payments) to be madeto shareholders during each of a plurality of consecutive periods basedon (1) a distribution rate specified in the managed distribution policyof fund 100 and (2) prior performance of fund 100. The manageddistribution policy provides for a number of payments to be providedduring each of the consecutive periods and contemplates that thepayments are fixed and are of equal amounts in each of the periods,unless there are one or more additional distributions made sometimeduring a period. As described below, the distributions per share varyfrom period-to-period based on the prior performance of fund 100.

The managed distribution policy sets forth rules for calculating thepayments to be made in each of the consecutive periods for each share120 of fund 100. More specifically, the managed distribution policyspecifies a formula that determines how dollar amounts of the paymentsare to be calculated in the future based on the distribution rate andthe prior performance of fund 100 and how such payments are to bedistributed in the future. Due to market volatility, fund 100 does notspecify, at the inception of fund 100 or at any time thereafter, dollaramounts to be provided for the payments in the consecutive periods. Inother words, fund 100 does not guarantee any amounts of payments to bedistributed.

Payments to be provided during each of the consecutive periods in thefuture are to be calculated during each of the consecutive periods or ina period immediately preceding each of the consecutive periods. In oneexemplary embodiment, the calculations during the consecutive periodsare to be completed at the beginnings of the consecutive periods.

In an exemplary embodiment of the managed distribution policy, the priorperformance of fund 100 is quantified by a trailing net asset value(herein “NAV”) of each share 120 in fund 100. The trailing NAV for eachshare in fund 100 is calculated by averaging the NAV of each share infund 100 over a predetermined period of time preceding the time ofcalculation. Because the NAV is calculated for a predetermined period oftime preceding the time of calculation, the NAV is referred to as a“trailing NAV.”

In this exemplary embodiment, the managed distribution policy providesfor the calculation of per-share payments made by fund 100 to be basedon the trailing NAV (in addition to the distribution rate). Morespecifically, the managed distribution policy provides that the amountof each payment to be made in each of the consecutive periods is to becalculated to equal 1/nth of a predetermined percentage of the trailingNAV of each share in fund 100, as represented in the following formula:

$\begin{matrix}{{{{Distribution}\mspace{14mu}{per}\mspace{14mu}{Share}} = {\frac{{Predetermined}\mspace{14mu}{Percentage}}{n} \times {Trailing}\mspace{14mu} N\; A\; V}},} & (1)\end{matrix}$where the value “n” is to equal the number of payments to be made ineach of the consecutive periods defined by the payment schedule and the“predetermined percentage” is the distribution rate identified in themanaged distribution policy. The predetermined percentage (distributionrate) may, for example, be one of 3%, 5%, or 7%, respectivelycorresponding to embodiments of fund 100 as Fund A, Fund B, and Fund C.

Because the payments of fund 100 are actually calculated in the future,i.e., at some time after the inception of fund 100, and are based onprior performance of fund 100, e.g., the trailing NAV of each share infund 100, the distributions per share may vary from one of theconsecutive periods to another as the performance, e.g., daily NAV, offund 100 varies over time.

In an exemplary embodiment of fund 100, each of the consecutive periodsidentified by the managed distribution policy is a fiscal year, and themanaged distribution policy identifies that the payments made duringeach of the fiscal years are to be made monthly. In such an embodiment,the managed distribution policy directs that the monthly distributionsper share are to be calculated at the beginning of each fiscal year byaveraging a per-share NAV of fund 100 over a prior three-year period offund 100 in order to increase the relative predictability and relativestability of the distributions of fund 100 to shareholders fromyear-to-year. A modified version of the formula is to be used until fund100 has established three years of history. Thus, at the beginning ofthe first year of fund 100, each of the monthly payments to be providedin the first year is to be calculated using an initial per-share valueof fund 100; at the beginning of the second year of fund 100, each ofthe monthly payments to be provided in the second year is to becalculated using averaged daily per-share NAVs of fund 100 over at leasta portion of the first year of fund 100; and at the beginning of thethird year of fund 100, each of the monthly payments to be provided inthe third year is to be calculated using averaged daily per-share NAVsof fund 100 over at least a portion of the first and second years offund 100. At the beginning of the fourth year and subsequent years offund 100, each of the monthly payments to be provided in the fourth andsubsequent years is to be calculated using averaged daily per-share NAVsof fund 100 over the three years previous to the year for which thecalculations are to be made.

In another exemplary embodiment of fund 100, the distributions per sharemay be calculated in view of a hypothetical account of a hypotheticalshareholder of fund 100 assumed to hold shares in fund 100 purchased atinception. For purposes of the calculation of per-share payments made byfund 100, the hypothetical account is assumed to experience the samedistributions as the accounts of actual shareholders of fund 100 andthat no further purchases or redemptions are made for the hypotheticalaccount except by way of the automatic reinvestment of any and alladditional distributions in additional shares in fund 100. Morespecifically, in this exemplary embodiment of fund 100, the manageddistribution policy provides that the amount of each payment to be madein each of the consecutive periods is to be calculated to equal 1/nth ofa predetermined percentage of the average daily value of thehypothetical account over a specified period of time, as represented inthe following formula:

$\begin{matrix}{{{{Distribution}\mspace{14mu}{per}\mspace{14mu}{Share}} = {\frac{{Predetermined}\mspace{14mu}{Percentage}}{n} \times \frac{\begin{matrix}\begin{matrix}{{Average}\mspace{14mu}{daily}\mspace{14mu}{account}\mspace{14mu}{balance}} \\{{of}\mspace{14mu}{hypothetical}\mspace{14mu}{shareholder}}\end{matrix} \\{{over}\mspace{14mu}{this}\mspace{14mu}{period}}\end{matrix}}{X}}},} & (2)\end{matrix}$where the value “n” is to equal the number of payments to be made ineach of the consecutive periods defined by the payment schedule, the“predetermined percentage” is the distribution rate identified in themanaged distribution policy, and the value “X” is the number of sharesin the hypothetical account. The predetermined percentage may be one of3%, 5%, or 7%, respectively corresponding to embodiments of fund 100 asFund A, Fund B, and Fund C.

In a variation of the exemplary embodiment described in the previousparagraph, each of the consecutive periods identified by the manageddistribution policy is a fiscal year, and the managed distributionpolicy identifies that the payments made during each of the fiscal yearsare to be made monthly. In this variation, the managed distributionpolicy directs that the monthly distributions per share are to becalculated at the beginning of each fiscal year by averaging the valueof the hypothetical shareholder account over a prior three-year periodof fund 100 in order to increase the relative predictability andrelative stability of the distributions of fund 100 to shareholders fromyear-to-year. A modified version of the formula is to be used until fund100 has established three fiscal years of history. Thus, in the firstfiscal year of the fund, the monthly per-share distribution is based onthe initial account balance of the hypothetical shareholder; in thesecond fiscal year, the average daily account balance of thehypothetical shareholder over the first fiscal year (or the portion ofthe first fiscal year for which the fund was in existence) is used todetermine the monthly distribution per share; and in the third fiscalyear, the average daily account balance of the hypothetical shareholderover the first two fiscal years is used to determine the monthlydistribution per share. Finally, in the fourth and subsequent fiscalyears, the average daily account balance of the hypothetical shareholderover a prior three-fiscal-year time period will be used to determine themonthly distribution per share.

In a variation of the exemplary embodiments of fund 100 discussed abovein which the managed distribution policy sets forth monthly payments tobe made over a plurality of consecutive fiscal years, the manageddistribution policy calls for the distribution of a targeted amount ofcash to be provided to the shareholders of fund 100 on or about the 15thcalendar day of each month in a calendar year. The monthly distributionper share for fund 100 in a given calendar year is calculated as ofJanuary 1 of that year. The managed distribution policy contemplatesthat the payments to be provided during a calendar year are fixed duringthat year, unless there are one or more additional distributions withrespect to the same calendar year of fund 100, which would be coincidentto the calendar year. The monthly distributions per share for anycalendar year, however, are still expected to vary from year-to-yearbased on the performance of fund 100 during prior years.

Finally, it should again be emphasized that the distribution rates(predetermined percentages) of Funds A, B, and C differ and, therefore,their managed distribution policies differ. The managed distributionpolicies of Funds A, B, and C specify monthly payments that are to beprovided during consecutive calendar years. The monthly payments of FundA are calculated to equal 1/12th of 3% of the trailing NAV of each sharein fund 100 at the time of calculation; the monthly payments of Fund Bare calculated to equal 1/12th of 5% of the trailing NAV of each sharein fund 100 at the time of calculation; and the monthly payments of FundC are calculated to equal 1/12th of 7% of the trailing NAV of each sharein fund 100 at the time of calculation.

Developing an Investment Portfolio and Managing Fund 100

Continuing with the description of method 200, after establishing themanaged distribution policies, investment objectives, investmentstrategies and performance targets in steps 210-220, processingcontinues to a step 230 in which the administrator of fund 100 developsinvestment portfolio 110 based on quantitative analysis and professionaljudgment, and then continues to a step 240 in which the administratormanages fund 100 and particularly portfolio 110.

Generally, in step 230, the administrator of fund 100 (1) identifieseligible asset classes and investments for fund 100, (2) establishesstrategic asset allocation ranges specifying minimum and maximumlong-term allocations to eligible asset classes and investments of fund100 and (3) establishes a short-to-intermediate term asset allocationtarget for fund 100. The administrator's asset allocation target governsthe administrator's day-to-day investment decisions for fund 100 made instep 240.

In step 230, to identify eligible asset classes, the administrator usesquantitative analysis and professional judgment in an attempt to combinecomplementary asset classes across the risk/reward spectrum. Theadministrator may combine complementary asset classes with historicalcorrelations to one another that are less than a predetermined thresholdset by the administrator in order to generate positive long-term totalreturns through economic and market conditions with a level of risk lessthan a threshold determined by the administrator. While managing fund100 in step 240, the administrator need not maintain a fixed assetallocation policy for fund 100 (although the administrator may adoptsuch a policy), and the exact proportion of each asset class orinvestment may be changed to reflect shifts in the administrator's riskand return expectations. In other words, while managing fund 100 in step240, the administrator is not tied to an asset allocation policydeveloped in step 230. In summary, the administrator's goal for fund 100is to construct a broadly diversified portfolio that achieves theinvestment objective of fund 100.

Method 200 continues to a step 250 in which payments are calculated foreach of the periods of fund 100 and provided to shareholders of fund 100according to the managed distribution policy. As time progresses andafter payments are made, further adjustments to the asset allocations ofportfolio 110 may be required. Thus, method 200 may loop back from step250 to step 240 where the administrator may further manage fund 100.Method 200 continues as described above.

Referring now to FIG. 3, there is illustrated an exemplary method 300for constructing and managing investment portfolio 110 of fund 100, inaccordance with an exemplary embodiment of the present invention. Method300 illustrates steps 210-240 of method 200 in more detail.

Generally, to produce an investment portfolio that has a relatively lowprobability of year-to-year decline and/or a relatively high probabilityof maintaining real (rather than nominal) distributions, developing anasset allocation strategy involves dynamically allocating assets acrossa broadly diversified selection of investment opportunities. Theadministrator uses quantitative analysis and professional judgment in anattempt to combine complementary asset classes and investments acrossthe risk/reward spectrum. The goal is to construct a broadly diversifiedportfolio that achieves the investment objective of fund 100. Themulti-asset investment strategy of fund 100 is more likely to achievethe investment objective of fund 100 than would a conventional fixedallocation among stocks, bonds, and cash. As noted above, fund 100 maychoose from any of the following types of assets or investments (orothers): stocks, bonds, cash, money market investments, long/shortmarket neutral investments, absolute return investments,commodity-linked investments, inflation-linked investments, and realestate investments. The administrator of fund 100 constructs the assetallocation strategy to determine the proportions of asset classes andinvestments that reflect the administrator's evaluation of theirexpected returns and risks as an integrated whole.

As noted above, fund 100 may invest in both traditional assets (such asstocks, bonds, and money market funds) and non-traditional investments(such as absolute return strategies and alternative asset classes, likecommodities). The selection and weighting of asset classes andinvestments is determined by the asset allocation strategy of fund 100constructed using method 300. It is contemplated that asset allocationstrategies are flexible. Initially, fund 100 may obtain equity and fixedincome exposure through index funds, generate long/short market neutralreturns through specialized funds designed for this purpose andgenerally characterized as equity market neutral funds, make absolutereturn investments directly or through various financial arrangementsincluding shares in a specialized fund designed for this purpose, andgain exposure to the returns of a broad-based selection of commodityfutures through futures contracts, commodity-linked swap agreements,commodity-linked structured notes or other commodity-linked derivatives.The asset allocation strategy of fund 100 may change over the life offund 100 to alter these exposures.

Method 300 begins with a step 310 of generating models of asset classesbased on historical investment and macroeconomic behavior. Morespecifically, step 310 provides historical data for asset classes andoutputs the data, which data includes asset class and investment returnaverages, volatility, and correlations between the modeled asset classesand investments. In a step 320, the administrator reviews theseoutputted data and makes any adjustments as necessary to the models ofthe asset classes. In a step 330, projections of the modeled assetsclasses and investments are generated to estimate future performance ofthe asset classes and investments.

Processing continues to a step 340 in which method 300 receives variousinputs from the administrator of fund 100. Step 340 comprises sub-steps340A, 340B, and 340C. In sub-step 340A, the administrator specifies anexact payout pattern or spending strategy for fund 100. An example of anexact payout pattern or spending strategy is the managed distributionpolicy discussed above. In an exemplary embodiment, for the limitedpurpose of selecting candidate investment portfolios, the distributionsof fund 100 under its managed distribution policy and each of thecandidate investment portfolios are assumed, in sub-step 340A, (1) to bepaid in four equal installments at the end of each quarter of each year,and (2) to sum to 5% of the average balance at the end of the mostrecent twelve quarters, with the initial year's payments totaling 5% ofthe initial purchase.

In sub-step 340B, the administrator determines candidate portfolios ofinvestments and/or asset allocation strategies to be modeled, as well asany hard constraints on the investment allocations for portfolio 110.The administrator selects viable candidate portfolios based on aconsideration of a wide range of strategic inputs, which may includesome combination of the following factors (or others): the priorperformance of fund 100; value at risk and expected shortfall;volatility; macroeconomic factors; current and expected marketconditions; cash flows; estimates of changes in the spreads between theexpected returns of eligible asset classes and investments; historicaland expected correlations between and among asset classes andinvestments; quantitative modeling of the likelihood that a proposedcombination of assets and investments will achieve the investmentobjective of fund 100; and the results of stress tests.

Finally, in sub-step 340C, the administrator determines the quantitativeobjectives to be optimized for candidate portfolios for considerationfor selection as portfolio 110 of fund 100. Examples of quantitativeobjectives that the administrator may specify in sub-step 340C include:median simulated real geometric mean return over 30 years, mediansimulated real geometric mean growth in simulated distributions over 30years, median simulated nominal geometric mean growth in simulateddistributions over 30 years, median simulated real geometric mean growthin simulated distributions over 30 years, estimated probability of a 5%year-to-year decline in simulated nominal payments, estimatedprobability of 3 consecutive years of a 5% or more decline in simulatednominal payments over a 30-year history, estimated probability ofmaintaining nominal value of simulated nominal payments over a setperiod, and estimated probability of maintaining real value of simulatednominal payments over a set period.

Continuing with the description of method 300, in a step 350, theadministrator uses a simulation to identify candidates for portfolio110. Particularly, the simulation uses the data supplied by theadministrator in sub-steps 340A-C and the results provided by step 330to optimize construction of portfolio 110 across multiple asset classesand investments. In an exemplary embodiment, the simulation is aregression-based Monte Carlo simulation that runs a large number ofcycles on each possible portfolio, with each run simulating long-termfuture performance. While particular types of simulations may beconsidered superior to others and the overall performance of fund 100may be highly dependent on the robustness of the simulation performed,the present invention is not limited to or dependent upon the use of anyparticular type of simulation. The results, i.e., the modeled portfoliosand asset allocations, of the capital markets simulation model areoutputted and plotted in a step 360.

Referring now to FIG. 4, there are illustrated exemplary results plottedin step 360, which results are provided by the simulation performed instep 350. Each portfolio is plotted by its probability of maintainingreal spending power after 20 years and its probability of a 5% declinein payments from one year to the next. Optimal portfolios lie along theupper frontier of plot 400, as they have the greatest probability ofmaintaining real spending power after 20 years given a particularprobability of a 5% decline from one year to the next. Although notillustrated, it is also contemplated that plot 400 may plot probabilityof maintaining nominal spending power after 20 years rather than realspending power.

Continuing again in method 300 illustrated in FIG. 3, after the resultsof the capital markets simulation model are plotted in step 360,processing continues to a step 370. In step 370, the administratorchooses an investment portfolio from the modeled results plotted byprobability of year-to-year decline versus probability of maintainingreal distributions greater than a predetermined probability. Theadministrator therefore selects an investment portfolio from the upper“efficient” frontier of plot 400, from candidate investment portfolioshaving a relatively low probability of year-to-year decline and/or arelatively high probability of maintaining real distributions.Embodiments in which the administrator considers probabilities ofmaintaining nominal spending power rather than real spending power arealso contemplated.

Finally, in step 380, the advisor seeks to manage fund 100 consistentwith a variety of statistical and compliance-based risk managementcontrols and procedures. As the administrator manages fund 100 accordingto the calculated asset allocation strategy in step 380, theadministrator of fund 100 may alter the asset allocation strategy at anytime to incorporate additional asset classes or investments intoportfolio 110 or to change the weightings of asset classes andinvestments represented in portfolio 110 in an effort to reduce overallrisk or improve risk-adjusted returns consistent with the investmentobjective of fund 100. The administrator of fund 100 may use the capitalmarkets simulation model described above to generate revisedforward-looking asset class and investment performance expectations foroptimization of portfolio 110 at any time during the life of fund 100.More specifically, the administrator may model a plurality of additionalcandidate investment portfolios and choose a reallocated investmentportfolio from the modeled results that is expected to have a relativelylow probability of year-to-year decline and a relatively highprobability of maintaining real or nominal distributions. Thus, theadministrator may re-optimize the asset allocation strategy of fund 100,and therefore the asset allocation of portfolio 110 of fund 100, at anytime.

The managed distribution policy of fund 100 is not supported by any formof guarantee, line of credit, credit support or any other form offinancing intended to guarantee distributions or investment performanceto shareholders. Instead, fund 100 makes distributions in accordancewith its managed distribution policy, with the result that distributionsare likely to vary over time. Accordingly, investors in fund 100 may seetheir year-to-year distributions grow or decline roughly in tandem withaverage fund performance over a trailing 3-year period (subject to theterms and conditions of the managed distribution policies). The resultsof the administrator's investment models, however, indicate that fund100, and therefore the accounts of the investors in fund 100, are notlikely to run out of money over time. Of course, fund 100 may experiencelosses, in which case the automated payout mechanism may cause investorsto consume a corresponding portion of their principal over time. Otherembodiments of fund 100 in which fund 100 does guarantee that themanaged distributions will be met are contemplated.

As noted above, fund 100 may be embodied as one of Funds A-C. Each ofFunds A-C is targeted to appeal to a different set of investors,although some overlap is possible. It should be noted that Funds A-C mayattract assets from outside of the retirement channel, given the focusof Funds A-C on regular cash flows and principal preservation.

Fund A is expected to have the greatest appeal to retirement investorswho seek only a modest current payout from their assets, but who wish tosee their payouts and capital increase over time. Fund A is expected tosustain a managed distribution policy with a 3% annual distributionrate. Compared to the other subject funds, Fund A has a high probabilityof generating growth in both capital and payouts that exceeds inflation.If successful, Fund A should provide long-term capital appreciation.

Fund B is likely to appeal to retirement investors who want to balance aneed for a current payout from their assets with a desire to maintainthe purchasing power of their payouts and capital over the long term.Fund B is expected to sustain a managed distribution policy with a 5%annual distribution rate, while providing inflation protection andcapital preservation over the long term.

Fund C is likely to appeal to retirement investors who require a greaterpayout level to satisfy current spending needs. Fund C is expected tosustain a managed distribution policy with a 7% annual distributionrate. Although the payouts and capital of Fund C are not expected togrow at a rate that keeps pace with inflation, Fund C does seek topreserve the “nominal” (or original) value of invested capital over thelong term.

Although specific embodiments are described herein comprising Fund A,Fund B, and Fund C, it should be understood that the funds may beoffered with any incremental annual distribution rate that has areasonable probability of providing the targeted returns. Furthermore,although several exemplary embodiments of fund 100 are described aboveas computing payments based on the average daily account balance ofhypothetical shareholder over three calendar years, different timeperiods may also be used.

As noted above, in an exemplary embodiment of method 300, the simulationperformed in step 350 is a regression-based Monte Carlo simulation. Suchan embodiment of method 300 uses the regression-based Monte Carlosimulation to advantage over conventional simulation tools, such ashistorical time-pathing and basic Monte Carlo simulation.

Historical time-pathing consists of generating future return scenariosbased on an asset's historical returns over a chosen time period. Sincethis historical analysis is restricted to the observed historicalsequence outcomes, each scenario simply starts at a different date. Alimitation with this approach is that it can exclude extreme-tailedpossibilities (rare events never recorded in the historical data samplethat could have occurred).

In basic Monte Carlo simulation, return scenarios are drawn from aselected probability distribution of outcomes, rather than replicatingchronological segments of historical series. In essence, an asset'ssimulated return at any point in time will equal its long-term averagereturn plus or minus “noise,” the magnitude of which is dictated by thehistorical volatility of the asset. Although popular among certaininvestment professionals, basic Monte Carlo techniques have their ownlimitations. Often, basic Monte Carlo tools assume that asset returnsare uncorrelated with the assets' own past returns (i.e., not seriallycorrelated returns) and that correlations with other asset returns inthe portfolio are fixed (i.e., fixed cross-correlations among assetreturns).

Referring now to FIG. 5, there is illustrated a capital markets model500, in accordance with an exemplary embodiment of the presentinvention. Capital markets model 500 is used to perform steps 310, 330,and 350 of method 300.

Capital markets model 500 is based on the theoretical notion that thereturns of various asset classes reflect the compensation investorsreceive for bearing different types of systematic risk (or beta). Toreasonably forecast the potential distribution of future asset returns,capital markets model 500 is designed to identify the primarymacroeconomic and financial risk factors and how they influence assetreturns over time.

Using a long span of monthly financial and economic data, capitalmarkets model 500 estimates a dynamic statistical relationship betweenrisk factors and asset returns. In an exemplary embodiment, capitalmarkets model 500 uses regression-based Monte-Carlo simulation methodsto project these relationships in the future.

The return-forecast portion of capital markets model 500 involves threefundamental processes, as illustrated in FIG. 5: (1) a core module 510,(2) an attribution module 520, and (3) a simulation module 530.

Core module 510 implements a dynamic statistical model of globalmacroeconomic and financial risk factors. Its main function is togenerate forecasts of these economic and financial risk factors overdifferent time horizons. In an exemplary embodiment of capital marketsmodel 500, core module 510 implements a vector autoregressive model(VARM). In this embodiment, the VARM measures the interrelationship ofthe various risk factors with each other. This process begins with theVARM estimating relationships (more specifically, regression “betas”)among the system of risk factors based on historical data. The modulecan then be used to project the estimated relationships into the futureover any time horizon. An exemplary time horizon is ten years or longer.

Exemplary risk factors used by core module 510 include the following:

1. Global equity factors: These risk factors are the core drivers ofasset prices that are linked to the performance of both domestic andinternational stock markets.

2. Global fixed income factors: This group of risk factors includes theprimary ones that account for all of the stylized characteristics of theglobal term structure of interest rates or yield curves. The yield curveis considered a leading indicator of economic activity and inflationexpectations. International fixed income factors capture differences inlong-run inflation expectations between the U.S. bond market and majorforeign governments' bond markets, as well as differences in theexpected rate of real economic growth and monetary policy. It isimportant to note that the fixed income factors within core module 510permit the generation of a complete term structure of U.S. andinternational government bond yields (ranging from one month to 30 yearsin duration) for every model simulation at every future point in time.

3. Global economic factors: These risk factors capture current businessconditions, inflation shocks, and realized fluctuations in the globalbusiness cycle. Global economic and financial conditions are alsosummarized by commodity markets and foreign exchange markets indicators.For instance, currency risk factors help to explain differences inrealized returns between U.S. and unhedged international assets.

A benefit of core module 510 is that it models all of these exemplaryglobal financial and economic risk factors collectively and dynamicallyusing a regression-based framework. Consequently, each of these threerisk-factor groups is important to the accuracy of the forecasts ofcapital markets model 500.

Attribution module 520 relates the global economic and financial riskfactors to the returns of various asset classes, including internationalequities. The main function of attribution module 520 is to “map” thereturns of those asset classes to contemporaneous changes in the coreglobal risk factors. This mapping is based on observed historicalrelationships and is estimated using regression techniques.

For example, attribution module 520 may include the return differentialbetween unhedged international equities and domestic equities.Attribution module 520 captures some of the variability in this returndifferential based on patterns in certain global equity risk factors,changes in the shapes of the U.S. and international yield curves, andfluctuations in the value of the U.S. dollar, among other factors.

Simulation module 530 constructs scenarios for all risk factors andasset classes represented in modules 510 and 520. Simulation module 530creates a distribution of future returns, volatilities, and correlations540. In other words, it simulates a broad range of possible asset-returnoutcomes (as opposed to a single-point forecast). In this way,simulation module 530 and, therefore, capital markets model 500 accountfor the volatility of asset return forecasts.

As noted above, in an exemplary embodiment, capital markets model 500(specifically, simulation module 530) follows a regression-based MonteCarlo simulation method. In a further exemplary embodiment, the vectorautoregressive model of core module 510 is combined with a Monte Carloapproach.

As previously discussed, a regression-based Monte Carlo method is aneffective way to incorporate statistical uncertainty into forecasts. Asensible approach for dealing with statistical uncertainty is animportant piece of any analytical model, since the model needs toprovide investors with an adequate framework to assess unanticipatedrisks. In an exemplary embodiment, for each quarter in the forecasthorizon, capital markets model 500 simulates 10,000 scenarios, yieldinga complete distribution of potential future paths for the various riskfactors and asset returns at various forecast horizons.

FIG. 6 illustrates exemplary distributions of outcomes generated bysimulations of capital markets model 500 for selected asset classes(U.S. intermediate-term bonds and U.S. equities), in accordance with anexemplary embodiment of the invention. Although not illustrated in FIG.6, the outputs of simulations can also be summarized in reportscontaining key statistical characteristics of the simulated data. Anarray of summary statistics, including means, medians, and standarddeviations, may be tabulated for the various asset-class returns atvarious forecast horizons.

The execution of model 500 can be divided into two phases. A first phaseincludes the three modules as previously described: core module 510,attribution module 520, and simulation module 530. The final outcome ofthis first phase is the distributions of returns and volatilities 540 atthe level of each asset class. The second phase consists of combiningthe asset classes' simulations to create a full set of potentialinvestment portfolios to be considered. Thus, the simulation output frommodel 500 forms the basis for further analysis and simulations at theportfolio level. Outcomes are combined with exemplary objectives, risktolerance, and investment horizon of the fund.

It should be understood that some or all of the steps of methods 200 and300 and some or all of the functionality (modules) of capital marketsmodel 500 may be carried out by or with the assistance of a computer,including but not limited to automated processes for the following: (i)all or any portion of the fund management processes; (ii) issuing,buying, and selling of shares and underlying securities; (iii) receivingand transmitting transfers to and from financial institutions for thepurchase or shares or the distribution of periodic payments toshareholders; (iv) calculating the amount of periodic distributions; (v)computerized accounting; (vi) computerized receipt and storage ofshareholder data; (vii) computerized reporting to shareholders; and(viii) other computerized or automated functions comprised within themanagement, distribution, servicing, and other activities in connectionwith fund 100 and model 500. It should also be understood that theprogramming techniques necessary to automate such steps and modules bycomputer are well known in the art.

Although the invention is illustrated and described herein withreference to specific embodiments, the invention is not intended to belimited to the details shown. Rather, various modifications may be madein the details within the scope and range of equivalents of the claimsand without departing from the invention.

1. A method of administering an investment fund, the method comprising: creating a plurality of shares in the investment fund for sale; providing a managed distribution schedule comprising a plurality of consecutive annual periods, a number of payments to be provided during each of the consecutive annual periods, and a formula for calculating a value for each of the payments, the value comprising 1/n^(th) of a predetermined percentage of a designated value corresponding to one of the plurality of shares, wherein n equals a number of payments, and the designated value for at least one of the consecutive annual periods comprises a trailing Net Asset Value (NAV); providing an investment strategy for investing in assets to provide funds sufficient to meet the managed distribution schedule, including selecting an asset allocation strategy chosen from an efficient frontier of modeled asset allocation strategies plotted by probability of year-to-year decline and probability of maintaining real or nominal distributions, the assets composing an investment portfolio; issuing at least one share to an investor in exchange for funds received from the investor; investing the received funds according to the investment strategy; calculating annually, by a computer programmed to perform such calculations, the value of each of the payments to be provided according to the managed distribution schedule in a period; and providing each of the payments to the investor during the period.
 2. The method of claim 1, wherein the trailing NAV is calculated by averaging NAV over a predetermined amount of time.
 3. The method of claim 1, wherein the investment strategy is designed to preserve a value of the assets, as a whole, on a real or nominal basis.
 4. The method of claim 1, wherein the investment strategy is designed to achieve a long-term performance target.
 5. The method of claim 1, wherein each of the periods comprises a year and n=12.
 6. The method of claim 5, wherein: for a first year of the investment fund, the designated value comprises an initial per-share value, and for a second year and subsequent years of the investment fund, the designated value comprises a trailing NAV calculated using an averaged daily per-share NAV over at least a portion of years of the investment fund prior to the second or subsequent years.
 7. The method of claim 6, wherein for a third year of the investment fund, the designated value comprises an averaged daily per-share NAV over at least a portion of the first and second years of the investment fund.
 8. The method of claim 6, wherein for a fourth year or subsequent years of the investment fund, the designated value comprises an averaged daily per-share NAV over at least a portion of three years of the investment fund previous to the fourth or subsequent years.
 9. The method of claim 1, further comprising: periodically modeling, by a computer programmed to perform such modeling, historical results of asset classes and investments represented in the investment portfolio and asset classes and investments not represented in the investment portfolio; adjusting the asset allocation strategy of the investment portfolio to a revised group of asset classes and investments; and reinvesting or rebalancing the investment portfolio according to the adjusted asset allocation strategy. 